Are you getting ready to buy a home and get a place of your own in 2019? It’s natural to start considering your mortgage options now.
If you’re looking for a home and can afford the monthly payment, but you have limited savings built up, it’s extremely helpful to find a loan that requires no down payment. Many people are familiar with the fact that this is offered by VA loans, but there’s another loan option that offers this benefit without you having to be in service or a veteran.
The USDA loan offers the option to get into a home without a down payment. In addition, the costs associated with a USDA loan are often cheaper than an FHA loan for the same loan amount.
What’s a USDA Loan?
USDA loans are guaranteed by the U.S. Department of Agriculture. The idea is to provide affordable home financing for people in rural areas or on the outskirts of suburbia.
Quicken Loans provides USDA loans that are then backed by the U.S. Department of Agriculture.
With that out of the way, what makes a USDA loan special?
USDA Loan Advantages
There are a couple of major advantages to USDA loans that make them one of the most attractive loan options on the market. Let’s touch on those.
With the USDA loan, there’s no down payment required. This can help free up resources for people with just a little bit of savings. You can take the money you would’ve spent on a down payment and use it to furnish your home or create a rainy day fund.
Although there are other low-down payment options, those savings can really add up. On a conventional loan with a 3% down payment and a $200,000 purchase price, the upfront down payment is $6,000.
Lower Loan Costs
There are upfront and monthly costs associated with getting a USDA loan called guarantee fees. However, these are lower than comparable mortgage insurance premiums (MIP) for FHA loans.
The difference is significant. Let’s take a look at that $200,000 loan amount again.
For FHA, the upfront mortgage insurance premium is 1.75% of the loan amount. This means you have to pay $3,500 at closing or have it included in your loan balance. You also have an annual premium that’s based on your down payment or equity amount. For a $200,000 loan amount, if you made the minimum down payment of 3.5%, the annual premium is 0.85%. If you pay that premium over the course of the year, it comes out to $141.67 per month.
Let’s compare that to a $200,000 USDA loan.
USDA loans have upfront guarantee fees of 1% of the loan amount, so you would pay $2,000 at closing or have that amount rolled into the loan. The annual guarantee fee represents just 0.35% of your average unpaid principal balance each fiscal year. Your initial premium based on the loan amount would be $58.33 per month. It would go down as you pay the loan off.
That’s a lot of math, but the bottom line is it translates to a lower monthly payment.
Qualifications for USDA Loans
There are certain things that will help you qualify for any loan. One of them is keeping your debt-to-income (DTI) ratio on the low side. DTI is a comparison of all your monthly debts to your monthly income. This allows lenders to make sure you’re not straining your budget so you can make your mortgage payment.
For the purposes of getting a USDA loan, you need a median FICO® score of 640 or higher.
It’s also a good idea to have some reserves set aside so that you can cover your full monthly mortgage payment for a while in the event of an emergency, job loss or other event impacting your income.
While these general tips will help you, there are a few things unique to USDA loans that you should be aware of.
USDA loans were designed to help with the development of affordable housing in rural areas. This doesn’t mean you have to be a farmer to get the loan, but it does mean that you can’t live in or around a major population center.
Fortunately, most of the country qualifies to get a loan under this program. You can check by putting your address into this eligibility map. If you live in an area that’s not marked by the color orange, you may get a USDA loan.
In order to be able to get a USDA loan, you and all the adults in your household can’t make more than 115% of the median income in your area.
Household income is an important distinction because it includes the income of those adults living with you without regard to whether they’re on the loan.
Importantly, you can exclude the cost of child care under many circumstances. It’s also important to note that if any adults in the home are full-time students, only a certain portion of their income is counted for qualification purposes.
You can use this income calculator from the USDA to help you get an idea of whether you qualify. One of our Home Loan Experts would also be happy to talk this over with you.
If you think a USDA loan might be right for you, you can start your application online or speak with one of our Home Loan Experts by calling (888) 980-6716.
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